The National Treatment Principle
Introduction
The “national treatment” principle is embodied in Art. XVII of the GATS and requires countries to treat both foreign and domestic service providers equally. This obligation implies the absence of all discriminatory measures that may modify the conditions of competition to the detriment of foreign services or service providers. Specifically, the provision calls on members to “accord to services and service suppliers of any other Member….treatment no less favourable than it accords to its own like services and service suppliers”.
National treatment under GATS is a conditional obligation, meaning that it applies only to sectors specifically listed by a member in its GATS schedule. In addition, members may list limitations on how far they will guarantee national treatment. If these conditions are not inscribed as limitations on national treatment in the member's schedule, they would be violations of the principle and liable to challenge. No new limitations on national treatment can be inscribed into a member's schedule. Limitations inscribed by members can be added to or modified only if compensation is paid to adversely affected members.
This project aims to study certain fundamental features of the “national treatment” obligation under Art. XVII of the GATS. For this purpose, the project is divided into three main Parts. Part I deals with the basic features, meaning and scope of Art XVII. Part II zeroes in on one unsetlled area of Art XVII, that of establishing criteria to identify “like” products, and looks at some possible approaches to it. Finally, Part III refers to a contemporary development in Art. XVII jurisprudence, relating to China's obligations, which is keenly followed by trade observers because of the fact that China's political ideology seems to be at loggerheads with the vision of the WTO.
National Treatment: Meaning And Scope
It is difficult to say with certainty what would constitute a violation of the national treatment principle although Art. XVII does link it to conditions of competition in the market. This implies that the approach in assessing violation should not take a doctrinal and theoretical approach obsessing over laws and regulations but rather an approach which is able to measure the practical effects of a measure on the foreign service suppliers and their services.
Article XVII GATS can be looked at from two aspects- content perspective and scheduling perspective. If viewed from a content perspective, any domestic measure which has the effect of discriminating between foreign and indigenous service suppliers can be in violation of Article XVII including measures which come under Art VI (dealing with domestic regulation) or under Art XVI(dealing with market access). But from a scheduling perspective, the ambit of GATS is much narrower so that it excludes from its purview the measures affecting services covered under Art XVI and Art VI.
It is pertinent to note that the GATT embodies a similar principle. However there are significant differences between the provisions of national treatment in the GATT and the GATS. In the first place, the GATT obligation is mandatory while the GATS obligation is voluntary. Secondly, GATT covers only products, while GATS includes both products (services) and producers, i.e. service suppliers. Thirdly, GATS Article XVII does not distinguish between tax and other regulatory measures. Lastly, GATS Article XVII does not contain a reference to ‘directly competitive products' but only to ‘like' services and service suppliers.
Art. XVII does not contain an exhaustive listing of the types of measures which would constitute limitations on national treatment. The 2001 Guidelines for the Scheduling of Specific Commitments under the GATS provide some examples of scheduling in the context of Art. XVII GATS. For eg: preference to domestic suppliers of audiovisual services in the allocation of frequencies for transmission within the national territory or a measure stipulating that prior residency is required for the issuing of a license to supply a service. Subsidies which have the effect of being a discriminatory measure within the meaning of Art XVII would either have to be scheduled as a limitation on national treatment or brought into conformity with that of Article XVII.
It appears that Art XVII has been drafted to take care of both de jure and de facto discrimination. The only case which lends support to this proposition is the case of EC-Bananas III, which is one of the few decided cases of the GATS. The allegation against the EC was that it accorded de facto more favourable treatment to distributors of EC origin. For example, EC rules allocated import licences for the importation of bananas from third country (ie., Latin America) and non-traditional African, Caribbean and Pacific (ACP) States at in-quota rates. Accordingly, distributors that had marketed third-country and/or non-traditional ACP bananas were entitled to 66.5% of import licences, while distributors that had marketed EC and/or traditional ACP bananas were entitled to 30% of import licences.
Both the Panel and the Appellate Body concluded that the EC rules allocating import licensing on the basis of operator categories de facto discriminated against service suppliers of the complaining Member, since these rules modified the conditions of competition to the detriment of foreign-owned or controlled service suppliers.
The Panel Report in the same case also developed a four-pronged test to establish inconsistency of a particular measure with Art XVII GATS. The four elements must be present cumulatively. This formulation was confirmed by the Appellate Body. According to the Panel, the complainant must establish that:
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First, the European Community had undertaken a specific commitment in the relevant sector and mode of supply (distribution of bananas)
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Second, that the European Community had adopted a measure that affected the supply of services in the sector and the mode of supply concerned
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Third, the measure at hand is applied to foreign and domestic like services and/or service suppliers; and
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Fourth, the measure accorded to foreign services/services suppliers is less favourable treatment than that accorded to their domestic counterparts.
The issue of specific commitment is a factual issue, the response to which must be found in the Schedules of Concessions of a WTO member. The onus of establishing the second element should be interpreted in accordance with the Appellant Body's ruling in Canada-Autos, the party carrying the burden of proof should at least establish who provides the service concerned and how he or she is affected by the measure adopted.
With regard to the third element, the EC-Bananas III Panel, in its report, held that to the extent that the services are like, those providing them are like service suppliers. The marketplace thus becomes the defining criterion to establish likeness between two services /service suppliers. On appeal, the Appellate Body accepted this line of reasoning.
Lastly, the Panel held that the different in-quota rates constituted less favourable treatment. However this finding has been highly controversial. It has been criticized because the EC distributors of bananas are not treated more favourably than their foreign counterparts but the trading in the kind of goods (types of bananas) have been given differential treatment. This means that both EC and non-EC distributors can profit from the measure if they trade in the EC and/or traditional ACP bananas. Therefore this is not a measure which should be considered to be a violation of EC's Art. XVII obligations.
Likeness Of “Like Products”
The issue of “like products” taken up by the Panel in EC Bananas III merits an exclusive discussion because it has been one of the most hotly debated concepts in WTO jurisprudence, more so under the GATT since it has seen more cases come up under it before the WTO Dispute Settlement Mechanisms. There is one point on which there is general agreement: that the application of the national treatment obligation and the determination of likeness gives rise to a wider range of questions- and uncertainties- under the GATS than the GATT because of the intangibility of services, the difficulty of drawing a line between the product and the producer and the combined reference to services and service suppliers among others.
In EC Bananas III, the Panel accepted that foreign and domestic services and service suppliers were like without justifying its decision in detail. Reference was made to the ‘nature' and ‘characteristics' of the services at stake, but the Panel did not explain what these were. This finding was repeated in the Canada Autos dispute, with the useful clarification that it was applied ‘for the purpose of the case' thus leaving the door open for a different approach in future cases. In the latest services dispute, the US-Gamblingcase, the parties developed detailed arguments regarding the characteristics of the types of games found in the gambling industry, coming very close to a physical test. For instance, the nature of the different types of games was discussed in detail and a comparison was made between betting on software algorithms, as in the case for Internet gambling, and using physical gambling paraphernalia as in a casino.
In EC-Bananas III, the Panel referred in general terms to the ‘nature' and ‘characteristics' of the transactions at issue, but did not elaborate further on these two criteria. Perhaps a criterion relating to the “intrinsic” characteristics could play a more useful role. For example, in the case of hair dressing services, the intrinsic characteristics of the service would involve cutting, dressing and styling the hair.
Some commentators have suggested that instead of judging the likeness of the products, what should be judged is the likeness of the supplier which would be determined by characteristics like skills, size of the company, number of employees etc. For example, in the US-Gambling case, the United States proposed a distinction based on the ownership and structure of suppliers, by arguing that state monopolies of gambling services are not like non-state private suppliers.
An important step in the GATS national treatment case law is the rejection of the so-called ‘aims and effects' test by the Appellate Body in the EC-Bananas III dispute. This test essentially leaves governments free to deal with economic and social problems, provided that any measures taken are not more restrictive of trade than is necessary to achieve the relevant objective. According to some scholars this test should not have been rejected but instead have been strengthened so as to ensure that only good faith measures, having a reasonable nexus with the regulatory objective sought, would be found compatible with Article XVII. This, in turn, would mean reading some kind of necessity test into GATS Art. XVII .
A look at the approach chosen in other trade and investment instruments may also be helpful. The basic two obligations of National Treatment and Most Favoured Nation apply under North American Free Trade Agreement(NAFTA) as under GATS although it has a different standard of likeness for national treatment in goods and services and its definition of likeness in services is based on broader concepts than that in the WTO.
China's Policy And Art XVII
This Article cannot be complete without a mention of the most recent concern in international trade law circles - that of ensuring China's conformity with its national treatment obligations under Art. XVII GATS. There is a rare development in the sparse GATS jurisprudence, that of the recently concluded Panel and Appellant Body Report in the China-Publications and Audiovisual Products case, the decision which was eagerly awaited.
Political censorship and ideological control define Chinese society today. The Chinese Parliament ratified accession to the WTO in 2001. In sector 4 of its services schedule, China made full commitments on national treatment for Mode 3 ( commercial presence) immediately after accession. China's commitment for audiovisual services is defined under Section 2D of the services schedule. The only limitation is with regard to the types of joint venture through which the service may be supplied.
The laws and regulations of China have placed restrictions upon the ability of foreign service suppliers to provide distribution services on audiovisual products. The Panel found that China had acted inconsistently with the national treatment obligation under GATS Article XVII by violating its commitments with respect to both ‘distribution services' and ‘audiovisual services' as well as with respect to distribution of reading materials.
The concern with Chinese State-owned entities behaving uneconomically has always been an early worry. China's trade system is unusually strict and imposes limitations on Chinese enterprises to engage in foreign trade and the bulk of trading enterprises remain State-owned or involve State money. Doubts have been expressed that the corporate governance in China is not adequate to preclude the local government from interfering in the day-to-day management of companies.
Article XIV(a) of the GATS was invoked by China as a legally permissible exception to the national treatment obligation which it has undertaken. Article XIV(a) allows for measures “necessary to protect public morals or to maintain public order”. Public morals has been observed to mean seen standards of right and wrong conduct maintained by or on behalf of a community or nation. This meaning of public morals could therefore be used to justify the ban on the importation of certain kinds of meat by Islamic countries which may contend that pork meat, for instance, is banned by the Holy Quran. This is a restriction based on religion belief. A restriction could also be based on principles on public policy where, for example, a country prohibits gambling and lottery tickets as a matter of public policy, a ban on sale of lottery tickets may be justified. However this contention by China was rejected by the Panel.
Closing Remarks
The “National Treatment” principle under GATS has had very little jurisprudential development by the WTO Panels. On the one hand, this is unfortunate as there exists no clarity of law in this regard while dispute settlement panels exercise judicial economy or qualify approaches to resolving disputes as strictly peculiar to a case. On the other, however, this can also be looked at optimistically as an opportunity to mould the jurisprudence in this area by scholarly writings suggesting various approaches to resolve disputes of such a nature, especially using the lessons learnt from GATT jurisprudence.
One of the most fundamental questions plaguing the WTO is formulating criteria to identify “like products”. The foremost and most fundamental case dealing with GATS Article XVII is the EC Bananas III case. Although it lays down certain basic elements of Art. XVII it fails to satisfactorily address the issue of “like” products. Scholars have grappled with this idea, some suggesting that the GATT criteria should be applied for this purpose while others in disagreement with the EC Bananas III Panel's rejection of the aims-and-effects test and calling for stricter application of this test by incorporating a necessity requirement.
What has emerged as an interesting issue in recent times is observing China trying to perform a fine balancing act between its WTO obligations on the one hand and its highly questionable internal policies and regulations on the other. China―Publications and Audiovisual Products represents only the third complaint against China to proceed to the stage of a Panel Report since China acceded to the World Trade Organization in 2001. The decision in China-Publications and Audiovisual Products clearly demonstrates that it will be difficult for China to justify its trade restrictions by referring to its political ideology and internal policies. Sooner or later, change will have to follow.
Bibliography
Cossy, Mireille, “Some thoughts on the concept of ‘likeness' in the GATS”, in Marion Panizzon, Nicole Pohl and Pierre Sauve (eds.), GATS and the Regulation of International Trade in Services World Trade Forum, 2008, Cambridge University Press, Cambridge, UK.
Gamberale, Carlo and Aaditya Mattoo, “Domestic Regulations and Liberalization of Trade in Services”, in Bernard Hookman et. al (eds.), Development, Trade and the WTO A Handbook, Reprint 2005, Atlantic Publishers & Distributors, New Delhi, India.
Gao, Henry, “ The Mighty Pen, The Almighty Dollar, and the Holy Hammer and Sickle: An Examination of the Conflict between Trade Liberalization and Domestic Cultural Policy with Special Regard to the Recent Dispute between the United States and China on Restrictions on Certain Cultural Products”, 2 Asian J. WTO & Int'l Health L & Pol'y 313 (2007).
General Agreement on Trade in Services” <http://www.worldtradelaw.net/uragreements/gats.pdf.>, Last visited on April 7, 2010.
Hoogmartens, Jan, “Can China's Socialist Market Survive WTO Accession? Politics, Market Economy and Rule of Law”, 7 Law & Bus. Rev. Am. 37 (2001).
Matsushita, Mitsuo and Thoman J. Schoenbaum, The World Trade Organisation Law, Practice and Policy, 2006, Oxford University Press, New York, USA, Second Edition.
Ortino, Federico, “ The Principle of Non-Discrimination and its Exceptions in GATS: Selected Legal Issues”, Available on SSRN < http://ssrn.com/abstract=979481> , Last visited on April 7, 2010.
Voon, Tania, “China - Publications and Audiovisual Products”, American Journal of International Law, Volume 104, Issue 4, 2009.
Cases
EC-Regime for the Importation, Sale and Distribution of Bananas, WTO Docs/WT/DS27/R
Canada-Certain Measures Affecting the Automotive Industry , WTO Docs WT/DS139/R
China―Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WTO Docs WT/DS363/R
United States Measures Affecting the Cross-Border Supply of Gambling and Betting Service, WTO Docs WT/DS285/R.
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